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The Progressive Income Tax Is Not Progress

After my two posts about the minimum wage laws (here and here), I guess I am on a political bent. Today I want to talk about killing off the progressive income tax system and replacing it with a flat income tax.

The current progressive tax setup is grossly unfair and serve as a disincentive to move ahead. The progressive system is based on the principle that taxpayers should pay more income tax as a percentage of their income as they earn more. This has been achieved, traditionally, using progressively higher income-tax rates applied on progressively higher incomes. Canada have four marginal tax rate while the US has six. The top rate kicks in at $120,887 in Canada and $336,551 in the US.

The Government Has It Backwards

The problem with progressive income tax is the government has it backwards. It shouldn’t be the more you make the more they take. It should the be more you make, the less they take! That is how businesses work. Many ad networks will give you a progressively bigger share of income as an incentive to produce more. Imagine how their business would do if they did it backward like the government.

The problems with increasing marginal tax rates are lower rates of economic growth, reduced rates of personal income growth, lower rates of capital formation, aggregate labor supply that is lower than expected, and reduced social welfare. In short, high and increasing marginal tax rates reduce economic growth by creating strong disincentives to hard work, savings, and investment. Why would you want to make that second $100,000 if the government is going to take half of it? A flat income tax would eliminate this disincentive.

Hall-Rabushka flat-tax reform

There are a number of well-known flat-tax proposals but the most discussed is that developed by Robert E. Hall and Alvin Rabushka of the Hoover Institution. It taxes all types of income once and at one rate. In their most recent analysis of the United States, Hall-Rabushka recommended replacing the personal federal rates and the various business tax rates with a 19 percent federal tax rate for both individuals and businesses.

People against a flat tax would say 19% is not enough to fund the operations of the country but they fail to take into account the increased incentive to make more money when people know that the government won’t be taking more when you make more. Would you try to make more if you only pay 19% tax instead of 50%?

I don’t expect to see Canada or the US go to a flat income tax anytime soon. However, if you are a Canadian living in Canada, there is a way to pay a flat 17% tax on your net income – as long as that income doesn’t exceed $400,000 in a year. I’ll talk about that in a future post.

Even in the US, it varies from state to state. For example, all states have federal tax, but most have their own sales tax and it varies. Some states have low sales tax, some have high. Where I am from, we don’t even have sales tax, but we have what’s called a state income tax. So instead of taxing you on how much you spend, its another percentage scale of how much you make.

Dang, John if I didn’t know any better you seem fairly conservative for a Canadian. This is why people America stays away from the John Kerry’s of the world, because he would be the last one to say what you have just said. It makes so much sense, but there are so many stupid politicians who either are stupid or pretend to be. They truly like to believe that middle class families pay too much tax and that upper class pays too little.

Everybody (who doesn’t cheat on their taxes!) pays too much tax. And, politicians largely waste tax dollars. Benjamin Franklin thought that a government that took 10% of a person’s income was considered harsh and excessive.

If you add up all the taxes Americans pay, I think (if I remember right) that it works out to be about 50% of our income going to taxes in one way or another. 😯

But, a flat rate tax would actually help the poor. It will make it easier for employers to hire people, as there would (hopefully!) be less red tape and “hidden” taxes and so on associated with hiring people. The wealthy could invest their money into productive use, rather than tax shelters and other schemes designed to reduce their (current) income taxes. All the loopholes that the wealthy use to reduce their tax rates would be gone. So, they’ll actually end up paying the full flat rate rather than getting their taxes reduced to the point where they pay less taxes than people with lower incomes.

And, then there is the money that will be saved by not having to pay tax professionals to figure out all the tax rules.

Obviously you’ve never been poor. Although I agree that many ‘poor people’ still find the money to smoke and drink, those who are truly unable to make ends meet can barely feed themselves much less invest in the market!

Yes, over the long term it would become much bigger. And over the long term, it will result in lower economic growth. The U.S. has already reached this point. That’s why we are dependent upon other countries to send the U.S. their most talented people. We do not have the social infrastructure to replenish the talent we require to run this country. This is all due to lack of investment in the social welfare and education of Americans. But hey, some people don’t care about that gap. They want more earings.

this “talent” disconnect you speak of is simply do to the American education system catering to the old Industrial economy while recent RAPID developments (summarized most eloquently by the Internet) have rapidly revolutionized the economy with the education system slowly filling this disconnect.

There are many more social factors that account for this gap than what you’re accrediting from lingering discrimination to tracking in the education system to unupdated Reganomics policies.

But the biggest contributor to the GAP is the DISCONNECT of the people that come out of highschool with the revolutionized economy.

Someone makes money and gets taxed (income tax). They buy property and get taxed (sales tax). The buy stuff to fill that property and get taxed (sales tax). They are charged yearly because they own that property (property/school tax). When they bough that property and that stuff, the seller had to pay tax on the sales (income tax). When our property owner dies, the money he leaves to someone is taxed (inheritance tax).

It’s too much. I say a straight property tax with breaks for low income families or persons who inherited property is a very good solution.

Or you can come to Pennsylvania, where we don’t tax clothing or groceries.

I don’t agree with you on property taxes. Property taxes are an assault on private ownership of property. With property taxes, you never truly own your property; you own it only so long as you can afford to pay the property taxes on it. That amounts to the government owning your property and merely renting it out to you.

Without property taxes, a person who buys a huge piece of land, lives off energy from the sun and wind and grows their own food would not support the country at all. I bet they would still expect emergency service, fire and police protection though.

The country serves to support its citizens, not the other way around. It does need some level of income in order to do the things that citizens expect, but it does not need to be through property taxes.

What a red herring. The richest people make the bulk of their income through capital gains! Capital gains in the U.S. are taxed at a flat rate of 15%. So the rich already have a flat tax at a rate lower than the lowest income wage earners. Duh!

I repeat. The rich already have a flat tax rate.

John, you need to do a lot more research to get a clue, seriously. It’s not funny at all.

Flat taxes penalize the lowest earners since the bulk of their income goes to living expenses, they’re taxed at a proportionately higher rate because they have to spend most of their money on living expenses while wealthier people do not. The rich have the luxury of saving and investing a greater portion of their income.

I often hear the argument that flat taxes allow the rich to invest and grow the economy further. Well low income earners do the same. They invest in things too. I also resent the classist statement you made which assumes that people who work harder earn more money. That’s simply a false assumption.

How do you explain high GDP growth rates of highly taxed nations such as in Scandinavia?

“The richest people make the bulk of their income through capital gains!” In case you didn’t know, Capital gain is not classed as income for the tax act, and it’s not flat. Furthermore, if you are in the business of buying and selling real estate, you are no longer qualify for the capital gain exceptions.

When I say income, I’m speaking in the generic sense. Thank you for reinforcing my point. You are right, capital gains are not treated as income. So for all the rich people who make the bulk of their money through capital gains, they get the flat tax rate of 15% in the U.S.

Note to John: Capital gains on real estate are taxed at the capital gains rate of 15% in the U.S.

I won’t even begin to mention all the tax deferral mechanisms that exist. Unless you have investment capital, you probably don’t know they exist. As I read the comments above. I see a bunch of young guys who want to be rich, yet most probably never will be. All the while feeling good about giving people with much more money than they will ever have a nice big tax break, so they can all collectively make it up with their own contributions. I guess some guys like the feel of bending over and taking it hard.

Ah but the dream of making it big keep people motivated! No one ever wants to hear about a tax increase because ‘What if I become rich someday?’ As you mentioned only about 1% ever get there. Are you one Marc?

I’ve been advocating a flat tax for the past 10 years. It used to be that people like me were considered to be the “lunatic fringe”, the “gestapo right wingers”. I’m poor by all monetary standards and for the life of me I can’t get how the hell the tax system in place now can be considered fair.

It’s not fair at all as it is, but introducing a flat tax would n’t help you if you’re low income. If you are low income why in hell would you want a flat tax? Probably because it sounds so simple and fair. Trust me, it isn’t.

Yes. There are so many things need to done and considered. This post and comments simply illustrate how rich and ruling elites keep us in dark while they are ripping this beautiful planet off of every thing it can offer.

“The warnings about global warming have been extremely clear for a long time. We are facing a global climate crisis. It is deepening. We are entering a period of consequences.” ~
Al Gore

I passed on your minimum wages rant because 200 year of use as a working solution proved you as wrong.

Progressive taxes is a little bit harder to defend as its not fully working , because the more people make the less taxes they pay as they hire “expert” who will make them legal in not paying there share of taxes.

The problem with taxes is that’s its money used to make the country work and people see that as an expanse when in fact its a contribution to a working system.

When the government cant pay on it’s own for something due to taxes evasion ( aka people not paying there share or paying any taxes ) they don’t wait for the next budget they go on borrowing money at insane rates that any sane people would refuse to pay for borrowing money.

I have a bigger problem with how the money is managed and the fact that we are signing a blank check to people who are there for only four years our return on investment should be what we look for not how much money we spend on taxes and the fact that no one look at lowering interest rate on our borrowing is insane.

The more money people make the more services , energy and system they consume and use. The really rich people never pay there share anyway they have Swiss or Caiman bank account and are doing taxes evasion on millions and they have good lawyers to defend them self from paying for years.

I am more for removing direct control over money from politician and make foundation that take care of things , example like roads , health care , military and that offer real ROI and clear description of what they do with the funds.

Put simply How much was spent on the hospital in your region , how much was paid for it ? How much military did you buy this year and at what price ? What road where built repaired and at what cost ?

You don’t save money by trying to save on taxes , you save by getting things that last longer are bought for doing the job now and at price that save million due to buying in bulk.

Taxes should be a lot simple , you make X amount you pay x amount , that’s it no taxes evasion or deduction or subvention to the brother of an elected government member who charge 100 time the usual cost of the good sold. You also get an ROI report on what you paid for telling you what your taxes bought.

We would kill the robber who steal 100$ from us but our own government steal thousand each year from us and we say nothing. And we think only good thing o rich people who steal million in taxes evasion.

Sharing tips on how not to pay your amount owed to the government is stealing me and shooting yourself in the foot , I have to pay more next time to compensate and you have to pay more because the government borrowed to do what was needed.

Your probably right , I mixed the trade Union who set there minimum wage with laws passed by Country. Not that it really matter passed the 100 year mark … I don’t see why you needed to mention and amplify that the U.S was late to adopt it , they tend to be when its for regular citizen …

Every time I hear about a flat tax rate I then hear things like:
“but there should be some breaks for the poor”
“also some businesses who dontate”
etc etc. Eventually you end up with just as many loopholes as the current system.

I don’t know about this one. Yes, in theory a tax deduction, or lack of tax increase, would be a great incentive for people to work harder and make the big bucks but it’s not that easy. Not all have the entrepreneurial ability to pop their heads just above the next tax bracket. Whether your taxed more or not, the more money you make, the more money you have. That is incentive for you.

Of course they do. Certain people are not more special than others, we are all born helpless, circumstances might help shape us but essentially anyone can do whatever they want. Changing the education system would help a little also though.

Part of being a Great American is paying taxes. By not paying taxes or devising other methods, you are essentially saying you are an evil doer. John Chow, please be a good American and do not solicit the public to avoid paying taxes.

Remember the Boston Tea Party? Being a Great American means a disdain for taxes. Remember that Benjamin Franklin thought that a 10% tax was too harsh; nowadays, Americans pay a whole lot more than that!

WTF, its everyones duty to avoid having to pay unnecessary taxes, its your responsibility to yourself and your family. Tax evasion is illigal and I’m sure John Chow doesn’t condone it, but avoiding it is a must.

The thing is that if it was say 20%, the 100K person would pay 20K in taxes while the 2M person would pay 400K. That’s not really unreasonable. While they’re not being taxed at a higher rate, they’re still paying 20 times more tax than the 100K person. Everyone still pays a proportional share.

Sorry, can’t agree with anything on this post. People who describe progressive income tax as “people who earn more pay more” just miss something obvious.

Even if there’s a flat, eg. 30% tax; a person who earns $10,000 will pay $3,000, while a person earning $20,000 will pay $6,000. Even under a flat tax system the rich will pay more than the poor.

That’s how it is, has always been, and should be. Someone who struggles to survive just can’t be ripped the same amount as a multimillionaire. How much more those who afford should pay – or progressive the taxing system should be – depend on a number of things, like government spending.

If government spending increases, they’ll have to increase taxes. And as there are some people who simple can’t afford to pay more, the system has to be made more progressive.

The Progressive Tax is OK, how is it set up can be discussed.
John lets imagine yourself just finishing school without any dollar in pocket.
with this what you say you would be getting high TAX right from the start and so you wouldnt have money to reinvest. so makeing money would by much more difficult for you.
Since you have this money now it is easy to say what you say.
Once you have money that you even do not need than you prefer free time and spending money more so there is not much development.
So I see everything balanced. There is plenty of teories in Micro economics and planty of graphs showing how it would be if.
World doesnt want rich to become even richer but poor become not poor.

The biggest problem with most tax reform proposals is that they are designed to be revenue neutral. What most countries really need is a smaller, more efficient government.

A small example: When Bush took office in 2001 the U.S. federal budget was $1.8 trillion. This year it’s $2.8 trillion. That’s more than 55% more in just 7 years time.

Not that this is likely to happen but here’s a bit more food for thought: The total amount of income taxes collected by the U.S. government this year is about $1 trillion. If the U.S. government would cut spending to the levels of 2001 they could totally abolish the income tax.

It’s also important to note that the increased spending isn’t just because of the war in Iraq and also having troops in Afghanistan. Even without the military spending, Bush has expanded the federal budget by a significant amount. I don’t recall the exact figures, but it’s still an astounding increase, especially considering Bush calls himself a “conservative.” I don’t see a lot of conservation of funds.

How is it unfair that the rich pay more? The poor are hit a lot harder by a 10% income tax than the rich are by 35%. After a certan point even a 50% or higher tax has no effect on you other than what luxury items you can afford.

I don’t see this benifiting the poor either. Their rich bosses can allready pay them more but they don’t because it would man less money out of their own pockets.

In Aus rich people have corporations and get taxed at 30%. And that’s considered a saving. We pay way too much tax 🙁 Lucky the government agrees and has been giving us tax cuts every year for about 5 years w00t w00t

Eaxactly. The tax burden on low income families is still more than on higher income, even with the progressive tax. That is because if you take $5000 away from someone who makes $20k a year it hurts more than if you take $15 away from someone who make $100k.

People who make $20,000 per year do not pay 25% tax. People who make $20,000 per year probably pay no tax and also receive a plethora of free government programs to help them day-to-day. If you don’t want to feel bad for the rich, how about the middle class? Same high taxes, no significant extra income and no free programs.

I live in the land of OZ but am interested in what is going on around the traps.

In reply to your post John, of course the system is unfair. It is unfair because the business owners and workers who make an honest living by *producing* marketable goods and services support people who do not actually produce anything.

The people who do not produce anything make their living by using *force* to take the fruits of your labour.

They create problems that don’t exist then create yet another department to fix these problems.

Just a couple of months ago, I stumbled upon a post that summarized some of the main points of those in favor of flat taxes. It also quoted Bjorn Tarras – Walhberg, Secretary General of the World Taxpayers Associations- the man largely responsible for the promotion of flat taxation system of some governments. The post can be found at

There is nothing patriotic about paying a cent more for taxes than you have to.
For those who think it is good for Americans to pay taxes, I wonder what the founders of this country that supported the Boston Tea Party would have to say about that.
Voting to “steal from the rich” is still stealing. We have allow politicians to encourage us to covet our neighbor who may have more than us. So, we get duped into thinking that the politicians will really tax just the rich and not us. The only people they really do not raise taxes on evenly is themselves. That is where the real tax loopholes exist.

Nice one joe! I have to admit tax is controversial. I am from a third world country and i definately know of people who who know of people including government officials that have got exiled for tax evasion. My point of view is simple, it kind of makes sense to have a progressive tax system in both an economics and peoples welfare standpoint, so if you work a 9-5 or work for someone absorb what the system got laid out. On the other hand if you are a bigtime blogger like John Chow and I (j/k i am not really) or if you own a business, make sure you register it as a business. Filing your taxes as “other” income v.s filing them under a business is like getting your rebate v.s shopping when prices are high. In capitalist countries businesses are rewarded by being taxed less than otherwise.

Most flat tax plans are deceptive in that they act as if a higher effective tax rate on corporations through the elimination of deductions would EVER be adopted. It would so damage the earnings of all corporations, murder the accounting industry, and eliminate a whole niche within the legal profession, that it could never garner political support.

John, if ad networks had a progressive compensation plan, they would still do fine — as long as all other ad networks also did, it is simply competition for distribution that results in extra incentive for larger earners. So maybe you should consider checking out the competition, income tax wise. Have you thought about moving to Andorra? 🙂

How about replacing the income tax with a consumption tax (ie: sales tax). After all, in Canada there was no income tax until the “temporary war income tax” was introduced as a temporary measure only for the duration of world war II.

In a recent Gallup Poll, over 50% of American adults believed the world to be less than 10,000 years old…that means a MAJORITY of voting-age adults believe the Earth to be younger than the invention of braided rope and domesticated dogs. That includes the guy running the country, and most of the ones currently trying for the job.

So john. You are saying people wont make money becuase tey know they will be taxed on it? Maybe if you were right beneath a tax bracket, otherwise that would be dumb. More money is more money no matter regardless of the tax they take out.

Having a flat tax rate is good for you becuase you are well off. If there was a flat tax rate it would have to be decently high to make up for the extra money they arent getting from the rich people. The thing i dont like about flat rate is that while this flat rate tax would be fine for a wealthy person, it could be devistating to a person who isnt as fortunate.

I didn’t say they won’t make more, I said it’s a disincentive to make more.

A flat tax wouldn’t have to be decently high to make up for the extra money they aren’t getting from the rich people because they’re not getting it from the rich right now. The rich has tax lawyers to shelter all their income. You really think they pay 50% on that million dollar? 😈

I plan to do a whole series on how the rich legally avoid tax on their money. You’ll be amazed at all the loopholes they have.

I’ve never heard of a person who just stopped making money because they were worried about paying a little more tax. Maybe the loop-holes aren’t patched because then it’s more fun to make more money…you get to make more then find the loop-hole to fit the income!

I’ll challenge you on that disincentive point. I’ve yet to meet anyone in the highest income bracket who has passed up on making more money because they would have to pay high taxes on it. Maybe I only know greedy people who just can’t help wanting more, but I can’t see why it would be a disincentive in reality. More money is more money.

I can name many situations where people pass up a chance to make more money because of increasing marginal tax. Many university professors refuse to teach summer school because half the sumer school income goes up in taxes. They rather take the summer off and travel. For many people, free time is just as important as making money. Free time is the end goal after all. 🙂

There’s one point you forgot to mention, a flat tax will increase compliance and reduce people off shoring income.

In Russia when they introduced a 13% flax tax (down from a 26% top rate) the amount of tax revenues collect actually went up! According to the Economist this was due to increased compliance.

This makes sense, let’s face it all of us internet marketers who make good money are bending over backwards to avoid paying taxes. There’s many ways of doing this including: off shoring your business, setting up a C-corp to upstream income, etc etc.

I support the idea of a fair tax, that is a 23% sales tax, and that’s it, no other taxes. This will bring in the same amount of revenue as the current US tax system and explode the economy since taxes on consumption are the least punitive to economic growth.

I think a national sales tax would have a more detrimental effect on lower income families than a flat rate income tax.

Perhaps it could be remedied with exceptions for certain necessities, as many states with sales taxes do. But, getting everyone to agree is not going to be easy. The sales tax exemptions among states vary widely, and it will likely create a mess of loopholes.

Much easier and more fair to have a flat income tax where everybody pays the same rate and you could possibly exempt people below a certain income level from paying at all.

Keeping it simple can make it more fair by eliminating loopholes that people will be bending over backwards to try to utilize.

Your statement that higher earning people (this is not the same as rich people – read the Millionaire Next Door or ask your rich friend how is ‘wealth’ is financed) should pay a lower rate is plain good business sense. However, I’d be delighted with just the flat rate. Also, get rid of capital gain tax, as capital gains combined with time is the safest way or ordinary people to a million dollars. (PS Belgium has no capital gain tax – just to let you know. It’s also far easier to get into Monaco from Belgium than it is from France.)

I also agree with Benjamin Franklin: 10% in taxes is a looooooot of money. Dubai, here I come!

If the government cannot finance legislated activities as prescribed by the Constitution of the land using approved, budgeted revenues, then the government needs to cut spending until it is within its budget.

Second, if high growth (revenue) is desired, then remove the earning caps of individuals. I know this from personal experience in sales. Put a cap on earnings and sales will flat line. Make commissions unlimited based upon sales and growth will soar.

“It is fair that the rich should pay more taxes”.

Realize this viewpoint has its foundations in the practice of FORCED WEALTH REDISTRIBUTION rather than sound economic theory or the need for adequate government financing.

If progressive taxation is your bag, feel free to make voluntary, personal contributions to the government at any time.

Who cares what Warren Buffet thinks? He is worth BILLIONS but advocates higher taxes for nearly everyone else because he feels bad about what taxes his secretary pays?

Warren Buffet is free to a) give his secretary a handsome raise – (it is a travesty that his secretary makes anything less than 150K a year considering who she works for) – and b) Warren Buffet may then donate his entire fortune to the US government upon his death (rather he is putting it all into a charity – nice tax break for his family, huh?).

Save the Buffet example and show me anyone of normal means in Canada or the US who wants to pay higher taxes. In every case, advocates of higher taxes want those taxes paid by “someone else”.

You’re being talked about by Deborah NG on the radio. Positive talk, of course. Not a major radio, but moms are gonna love you! Listen to the July 30th show if you’re interested. http://www.wahmtalkradio.com/

If not I suggest you follow up with a post on how to immigrate from the US to Canada because it looks like a Democrat pres is a lock, and myself and a lot of other web based entrepreneurs who aren’t tied down to a bricks and mortar business are looking for an exit strategy.

While your arguments are indeed very interesting to read John, they’re ultimately futile in this case. The simple reason is that it would require a Canadian government to come in, slash taxes to the rich by more than half and raise taxes on the poor. The odds of this being accepted by anywhere near a majority of Canadians are infinitesimally small.

Regardless of the future promises, the short term issues would prevent it from passing. That whole trickle-down theory didn’t exactly pan out for the lower income families south of the border several administrations ago.

It really doesn’t matter if it passes or not. The rich already don’t pay the state progress rate and never will. There are so many ways to get around the the progressive tax rules it’s not even funny. Like I stated in the post, I pay 17% tax on the first $400,000 of net income.

In the end, it’s the middle class that get hit the most. You can’t tax the poor because they got no money. You can’t tax the rich because they have tax lawyers to help them legally avoid paying tax. That leaves the middle class.

I consider myself to be middle class and I never feel as though the rich will be shouldering the cost of our social programs. I know that most of them find ways around most of the taxation rules since the rules have planted loopholes to allow them to do it. That way the politicians can say they’re increasing taxes on the rich while allowing their friends to bypass the new taxes.

I know that personally feel as though we’re all chipping in our fair share. The middle class may be chipping in more than its fair share, but regardless, we know where most of our tax money goes and we know that the top 1% can’t and aren’t shouldering the load for everyone.

Well,
The problem is that western countries rely on their governments to provide everything. There are people who say that we should have a sales tax to replace the income tax, but, the politicians would end up re-instituting an income tax, which means that we would end up paying more..

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